We’ve heard Warren Buffett continue to repeat an important phrase, “what the wise man does in the beginning, the fool does in the end.” This begs the question, when does a foregone conclusion become what we call “a well-known fact”?
The stock market is discounting an accelerating rate of technological change in our society. A mad dash by investors is anticipating a world organized like “The Jetsons” cartoon from my childhood. We thought it would be useful to look back at other points in time where great technological change was anticipated and see how that worked out for S&P 500 Index investors.
A Forbes article of July 1974 profiled John Templeton and highlighted some of the wisdom he implemented in his investment process. The article touched on his discipline of consistently praying to God “for wisdom and clear thinking” at the start of each directors meeting for the Templeton Growth Fund.
As we look out into the second half of 2017, it is important to understand that we believe the U.S. stock market has tried to “kill” investor enthusiasm. We would argue this enhances the position of the value-oriented and long-duration equity manager in a way that that doesn’t kill us and makes us “stronger.”
Walmart (WMT) recently made it clear to vendors that they should “get off” Amazon’s Cloud. This was one of two announcements which speak to the competitive landscape of business in the U.S. The other announcement came earlier when Amazon (AMZN) disclosed an agreement to buy Whole Foods (WFM) for $42 per share in cash.
During the most-recent Berkshire Hathaway Shareholder Meeting, Warren Buffett and Charlie Munger reiterated a point during the question and answer portion that has stuck with us. We feel compelled to share what we learned.
At the end of my freshman year in college (1977), my brother-in-law’s twin brother called me to ask if I wanted to go to the sixth game of the NBA Finals in Portland. I was a huge Trailblazer fan and was thrilled to sit in the top row of Memorial Coliseum, which held 12,665 fans. Not only was it an unbelievable experience for a lifelong fan (the Blazer’s won), but it was even more powerful because professional basketball was “the only game in town.” No other major professional sport (football, basketball, baseball) existed in Portland in 1977 and there is only one in town today.
We thought it would be very helpful to review Warren Buffett’s argument in 19991, the last time there was very high expectations attached to technology stocks and to the overall level of common stock prices. We will reference Buffett’s quotes by the year he said them. The sections labeled 2017 offer our current observations on the markets and thoughts from respected experts.
Each year we like to drill down on the wisdom imparted by Warren Buffett and Charlie Munger at the Berkshire Hathaway Annual Meeting. This year, we thought there were four key takeaways we can consider in running our portfolio of common stocks at Smead Capital Management.
As many of you know, we admire Warren Buffett and his “sidekick,” Charlie Munger. They seek out quality businesses at bargain prices and have a stunning record of success. Both personally and with stock ownership, they are notorious tightwads with their own money and the money of our common stock holding, Berkshire Hathaway (BRK.B).
Like a good attorney, we rarely ask a question for which we don’t have the answer. In the case of looking at sentiment in the economy and in the stock market, we like watching to get a feel for what our professional and individual investor clients are going through to see if it matches what we are hearing and seeing.
The current circumstance in the U.S. stock market reminds us of the mid-1960s. We thought it would be helpful to review what was going on back then and what took place in the following 16 years. It makes us believe that you want to own wonderful businesses and de-emphasize trust in the stock market’s ability to meet the financial goals of long-duration investors.
March 10, 2017 was the 8th anniversary of the bull market in stocks that began in 2009. While the economic recovery from that same period has been labeled many things including “muddle-through”, “new-normal”, or other various metaphors suggesting anemia, the stock market recovery has been quite the opposite.
On a recent business flight, I watched The Beatles documentary (Eight Days a Week) which featured the song “A Hard Day’s Night.” The movie chronicled, via previously unseen footage, the early years of The Beatles and the mania surrounding their tours and albums. This documentary and song could teach us about how to navigate the stock market in the U.S. and what demographics mean to American culture and economic trends.
A number of factors in the U.S. stock market are at historical extremes. We at Smead Capital Management like to look for what we call "well known facts" in the marketplace, also thought of as areas of extreme optimism and pessimism.
In September of 2010, we argued that oil prices were trading on psychology and entrenched beliefs, and could possibly have a real price of $10 per barrel. Investor bullishness was driven by the belief in peak oil theory, the slow transition to electric and hybrid engines, and the use of the commodity oil as an investment in the China boom.
At a recent industry conference, we were confronted by a chart, a presentation and a song. In early 2017, we find ourselves in an investment world where the merit of stock picking and "active" portfolio management are challenged regularly, which has contributed to a mass exodus of assets from "active" funds to low-cost index portfolios.
In a recent TV appearance on CNBC, the legendary portfolio manager, Bill Miller, argued in favor of owning shares of Amazon (AMZN) because of the immensity of their "addressable markets." As contrarian investors, this got us thinking about our three core tenets of investing, what markets we want to address, and how to spot industries which are near what Sir John Templeton called "the point of maximum pessimism."
Every great growth company hopes to make the transition from fast growth pioneer to sustainable growth blue chip. When the transition occurs, a grand divorce happens between the price-to-earnings (P/E) ratio and the future success of the business. What made us think of this was the annual forecasting dinner of the CFA Society of Seattle on the evening of January 19, 2017.
We are great admirers of the writing of the elite business publications like The New York Times and The Wall Street Journal. They recently stepped into one of our favorite subjects, technology company hegemony, which has developed in the business world in recent years.
Certain economic concepts have been a source of frustration to investors over the years. The movement of bond prices up or down to bring existing bonds in line with prevailing interest rates would be one example.
Over a three-year time period, stock prices tend to mean revert. This has spawned numerous investment approaches which try to squeeze capital gains out of those reversions.
It was announced on December 15, 2016 that the current Chairman of the Federal Communications Commission (FCC), Thomas Wheeler, would be stepping down as of January 20, 2017. He has been the lead arbitrator and backer of a concept called “Net Neutrality.”
We at Smead Capital Management are in the camp of long-duration investors who believe we’ve entered an extended period of intermittent interest rate increases, a reversal from the 35-year era of intermittent declining rates we have experienced since 1981.
As long-duration common stock pickers we seek to buy meritorious companies which fit our eight criteria for stock selection.
During our discussions with clients in October we were asked repeatedly what the outcome of the Presidential election would do to our investments.
As an observer of ten presidential election cycles while working in the investment business, we thought it would be a good thing to give the current stock market environment some historical context.
You might not think a movie about robbing banks illuminates some of the fundamentals of value investing, but then again, you might not have seen Hell or High Water.
The term “animal spirits” is a way to describe what drives human behavior to consume, take risk and engage the instinctual proclivities that are natural to economic living.
As a young stockbroker in the 1980’s, I was hungry for disciplines which could help me make money for clients. One of the most sensible things I came across was a theory by an investor that we refer to as the 70-20-10 rule.
We have a severe housing shortage in the U.S. which will take years to solve. It should drive economic growth for the next decade, provide good quality jobs and promote confidence which we’ve lacked since the financial crisis of 2007-2009.
